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Informational Contagion of Sudden Stops in a Global Games Framework

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  • Victor E. Vaugirard

Abstract

This paper highlights the cross-country spread of self-fulfilling financial crises through an informational channel. It sets up a two-country framework of investment with strategic complementarities and incomplete information about economic fundamentals. Each market may be subject to sudden stops, triggered by agents preemptively withdrawing their investments for fear others do so. After observing a massive capital outflow from one country, agents downgrade common fundamentals, and therefore have higher requirements regarding factors specific to the other country. This in turn may induce a crisis in the latter, which is not justified by idiosyncratic events or economic interdependence.

Suggested Citation

  • Victor E. Vaugirard, 2004. "Informational Contagion of Sudden Stops in a Global Games Framework," Open Economies Review, Springer, vol. 15(2), pages 169-192, April.
    • Handle: RePEc:kap:openec:v:15:y:2004:i:2:p:169-192
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    1. repec:ebl:ecbull:v:6:y:2004:i:18:p:1-10 is not listed on IDEAS
    2. Victor Vaugirard, 2005. "Beliefs, Bailouts and Spread of Bank Panics," Bulletin of Economic Research, Wiley Blackwell, vol. 57(1), pages 93-107, January.
    3. Vaugirard, Victor, 2007. "Informational contagion of bank runs in a third-generation crisis model," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 403-429, April.
    4. Moheeput, Ashwin, 2008. "Financial Fragility, Systemic Risks and Informational Spillovers : Modelling Banking Contagion as State-Contingent Change in Cross-Bank Correlation," The Warwick Economics Research Paper Series (TWERPS) 853, University of Warwick, Department of Economics.
    5. Manz, Michael, 2010. "Information-based contagion and the implications for financial fragility," European Economic Review, Elsevier, vol. 54(7), pages 900-910, October.
    6. Victor Vaugirard, 2005. "Crony Capitalism and Sovereign Default," Open Economies Review, Springer, vol. 16(1), pages 77-99, January.
    7. Victor Vaugirard, 2004. "Bank runs, political distortions and contagion," Economics Bulletin, AccessEcon, vol. 6(18), pages 1-10.
    8. Tai-kuang Ho & Ming-yen Wu, 2012. "Third-person Effect and Financial Contagion in the Context of a Global Game," Open Economies Review, Springer, vol. 23(5), pages 823-846, November.
    9. Victoria Miller, 2014. "A Crisis Transmission Channel for Reserve Currency Countries: A Cautionary Tale," Open Economies Review, Springer, vol. 25(4), pages 809-818, September.

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